Mathematical Sciences-Colloquium-"Bayesian Analysis for Asset Allocation with Investor's Views Considered" by Mihnea S. Andrei (WPI)

Friday, September 06, 2019
11:00 am to 12:00 pm


Floor/Room #: 

Speaker: Mihnea S. Andrei

Title: Bayesian Analysis for Asset Allocation with Investor's Views Considered

The Black-Litterman model combines the market equilibrium with
the investor's personal views and gives optimal portfolio weights. In
this paper we will review the original Black-Litterman model, we will
modify the model such that it ts in a Bayesian framework by consid-
ering the investors' personal views to be a direct prior on the means
of the returns and by including a typical Inverse Wishart prior on the
covariance matrix of the returns. We will then consider Leonard and
Hsu's (1992) idea for a prior on the logarithm of the covariance matrix.
We encountered both running time and memory allocation problems
when we applied the latter version to the whole S&P500. To overcome
such computational problems, Bayesian factor models are considered
for the analysis. This choice was also motivated by the strong connec-
tion between Black-Litterman and the Capital Asset Pricing Model,
which itself can be seen as a factor model. Sensitivity analysis for the
level of con dence that investors have in their own personal views were
performed and performance of the models was assessed on a test data
set consisting of returns over the month of January 2018.